In our previous post on March 31, 2015, we considered perfection certificates in the context of a share purchase transaction/ amalgamation/ name change certification. In this post, we continue to explore perfection certifications but in the context of a post-M&A or leveraged finance acquisition debtor.
Perfection certification: the debtor has acquired all its assets in the ordinary course of business.
Under the Personal Property Security Act (Ontario) (the OPPSA), and the personal property security acts of most other jurisdictions in Canada, a creditor can maintain priority over an asset if title to the asset is transferred and the secured party registers a financing change statement within the prescribed period of time. Section 48(1) and (2) of the OPPSA provides for the situation where collateral is transferred both with and without the prior consent or knowledge of the secured party.
The asset purchase certification would, among other things, identify to an incoming creditor any assets which were acquired by the debtor outside the ordinary course of business. As most companies are not in the business of purchasing all or substantially all of the assets of another company, disclosure of asset purchase transactions within the specified period of time would be disclosed under this certification.
To further understand the value of this type of certification, consider the following hypotheticals where you represent a lender, Creditor A, against the borrower, the Purchaser; the Seller is the seller of the particular asset in question, and Creditor B is a lender to the Seller.
Consider firstly the scenario where Creditor A and the Purchaser are about to enter a secured lending facility. As part of the collateral securing the facility, Creditor A requires a first priority security interest in the Purchaser’s very large and expensive piece of mining equipment (the Asset). In the Purchaser’s Perfection Certificate to Creditor A, the Purchaser discloses that the Asset was acquired 2 years ago from the Seller. As a result of this disclosure, given the importance of the Asset to Creditor A’s collateral package, searches should be done against the Seller’s name (and any predecessor names of the Seller within the prescribed period (see Part I of this post)). The results of those searches and how to deal with them are discussed below.
In the second scenario, Creditor A is providing financing to the Purchaser for the proposed purchase of all or substantially all of the assets (the Purchased Assets) of the Seller. The Purchased Assets will again form part of the collateral package securing the Purchaser’s loan from Creditor A. Creditor A should conduct due diligence against the Seller to ensure the Purchaser is obtaining the Purchased Assets free and clear of all liens. Therefore similar to the first scenario, Creditor A will request searches be conducted against the Seller’s name and any predecessor names of the Seller within the prescribed period.
If the searches conducted in either of the above scenarios reveal a secured party filing by Creditor B that encumbers the relevant assets, this filing will need to be dealt with in advance of or at closing of Creditor A’s financing:
- If Creditor B is a current creditor of the Seller, Creditor B will likely not be willing to discharge the registration covering the Asset/ Purchased Assets. For instance, Creditor B may have an all-PAAP filing against the Seller which underlying financing continues to be outstanding.
- In the first scenario where the Purchaser now owns the Asset, Creditor A will want assurance that their security interest will not be primed by the all-PAAP filing of Creditor B against the Seller, the Asset’s previous owner. In this situation, Creditor A can request a no interest letter which would be addressed to both the Purchaser and Creditor A from Creditor B, acknowledging that, (i) the Asset has been sold to the Purchaser free and clear of its lien, and (ii) Creditor B’s registration against the Seller does not extend to the Asset.
- In the second scenario where the Purchaser will own the Purchased Assets on closing, unless the Seller is continuing operations in some other capacity and Creditor B has agreed to continue financing the Seller, Creditor A will likely need to negotiate a payoff and discharge of Creditor B’s security interest.
In either scenario, if the Assets/ Purchased Assets are transferred without the prior consent or knowledge of Creditor B, Creditor B has 30 days from the day it learns the asset has been transferred to the Purchaser to register a financing change statement and prime Creditor A’s security interest in the same collateral. By conducting searches against the names of prior owners of assets, Creditor A can avoid prior ranking creditors coming out of the woodwork after financing has been provided.